Inside WME's $2.4 Billion Play for Sports Giant IMG (Analysis)

Ari Emanuel and Patrick Whitesell's pricey move for the global power (with plans to go public?) could lead to a lasting dynasty or a crushing defeat as rivals look to destabilize Hollywood's boldest agency.

Onthe morning of Dec. 19, moments after William Morris Endeavor and financial backer Silver Lake announced a deal to acquire sports and fashion powerhouse IMG, WME co-CEOs Ari Emanuel and Patrick Whitesell addressed the combined troops in an all-staff phone call. The duo, who were on the road rallying IMG's 3,500 employees at its offices in London, New York and Winston-Salem, N.C., walked through details of the business they were poised to acquire. "[Emanuel] was basically saying, 'We believe it's a great opportunity for our clients and our agency,' " says a person on the call.

But is it? Skeptics in Hollywood believe WME and Silver Lake vastly overpaid in their $2.35 billion bid for a company with $180 million-a-year EBITDA (the next highest bid, from CVC Capital, came in at less than $2 billion, say sources). And some predict a massive learning curve for Emanuel, 52, and Whitesell, 48, as they grapple with more than a dozen businesses in 30-plus countries -- primarily in a sports world largely unfamiliar to them -- while still running the busy Beverly Hills-based agency Emanuel co-founded as Endeavor in 1995. "The life of a sports property goes on forever," says Rob Prazmark, co-CEO of 21 Marketing, once owned by IMG. "Golf, tennis, the Olympics -- these are long-term plays. Will they be able to understand the different business models?" Rivals argue the combined WME-IMG will be burdened by as much as $1 billion in debt, which means $100 million a year could go to debt service.

Further, a competitor predicts that Silver Lake, the private equity firm that owns a collective 51 percent stake in WME and IMG, will pressure Emanuel and Whitesell to get the business in shape for a public offering during the next few years -- a daunting task. "You'd have to grow the company very aggressively to set it up for an IPO," says this rival. "That's a very difficult thing to do in [a few] years while you're integrating these companies."

Still, the IMG deal (if it closes in the spring as expected) leapfrogs WME over longtime rival CAA in terms of size and scope. Among its many businesses, IMG is the world's largest independent producer and distributor of sports programming, delivering more than 20,000 hours of content a year. It also is the top-ranked sports licensing agency and represents TV rights for nearly 100 colleges and conferences.

The allure of the fast-growing sports business, at a challenging time for movies and television, is obvious. "Sports is live entertainment that people want to consume in real time," says Rick Dudley, president and CEO of Octagon, a sports and entertainment marketing agency. "There's also certainty to it -- you have games every week, a season you can plan around."

But rivals say IMG executives were not compelled by terms of the deal to remain with the combined company. And some top talent has cashed in, thanks to the acquisition. "You've got a bunch of employee executives who have been just waiting for this payout for 20, 25 years," says an observer. "People are going to want to run out the door." IMG employees are said to have been held to raises of no more than 2 percent for the past three years as the company has been readied for a sale. Now, some might be eager to make more money, while others could fear for their jobs as WME seeks to eliminate redundancies.

Competitors also hope that IMG will prove a distraction for Emanuel and Whitesell, making it hard for Emanuel to manage the daily emergencies of such clients as Oprah Winfrey, Aaron Sorkin and Charlize Theron, or for Whitesell to tend to Ben Affleck and Matt Damon. "Every entertainment agency is going to be holding their feet to the fire to run the entertainment business," says one rival. "And if you're a competitor in sports, you're going to try to pick off every executive they have, key lines of business, key relationships. They've opened up a war on multiple fronts."

But a WME insider familiar with Emanuel and Whitesell's plans says the two intend to let top IMG managers run their businesses while they handle existing clients and sign new ones. Says another WME source: "I was emailing with them yesterday about our core business, and they were as on it as ever. These are 24/7 guys."

WME is already said to have locked in key IMG talent, including sports and entertainment president George Pyne and Ben Sutton, president of IMG College (whose marketing, licensing and media business accounts for about a third of the entire company's sales), to serve on the combined board. And on Dec. 23, WME hired former Microsoft exec Peter Klein as CFO of the merged company. IMG chairman and CEO Michael Dolan is not expected to stay on.

Longtime sports executives believe IMG's assets could be a great enhancement to WME if managed correctly. "IMG has always been one of the great content creators and packagers in the sports business," says Mark Noonan, founder and president of sports and entertainment marketing agency FocalSport. "You would think that would be a highly complementary business to what WME has been historically strong with."

As for the challenge of melding the cultures, a WME insider maintains that Emanuel and Whitesell are up to the task, citing Endeavor's successful merger with the much larger William Morris Agency in 2009 -- at the time, the largest agency takeover ever attempted. "It's only 19 years since they established Endeavor -- four guys and a bunch of files," he says. "Now look at them."